Berko: A history lesson on Schumpeter

Tuesday, March 04, 2014 7:00 AM

Dear Mr. Berko:

Tell me who Joseph Schumpeter is and why he is so important. I never heard of him.

J.W., Vancouver, Wash.

Dear J.W.:

Probably 97.84 percent of Americans can’t name an economist other than Alan Greenspan, Ben Bernanke or Janet Yellen. And 99.98 percent of Americans have never heard of Joseph Schumpeter, a brilliant Austrian-American economist who lived from 1883 until 1950. He was a short, balding, bug-eyed guy who dressed with the precision of a mannequin, had bad teeth and talked with a funny accent. This guy was always so serious that he had to look in a mirror to see whether he was smiling. This is the economist who formalized the concept of creative destruction, which clearly explains the economic disruptions in our society and culture.

Schumpeter explained economic growth (capitalism) as a series of long waves of technological revolutions, each lasting 50 to 60 years or so. These “waves” cause “gales” of creative destruction, in which old industries (camera film, adding machines, cassettes, iceboxes, typewriters, Linotype machines, landline telephones, etc.) are swept away and replaced by new industries. These new industries (e-commerce, organic light-emitting diodes, hydraulic fracturing, cellphones, 3-D printing, solar power, social networking, streaming, quantum computing, etc.) ramp up new economic activity, employing more workers, who purchase more products, creating more demand, which results in increased employment.

Schumpeter said the first gale of creative destruction (GCD), between the 1780s and the 1840s, was fueled by steam power. The efficiency of the steam engine caused the U.S. gross domestic product to grow fivefold, creating a fourfold increase in employment.

The second GCD, between the 1840s and the 1890s, was driven by the railroads, which replaced the wagon train, the stagecoach and sailing ships. This made it possible for industry to move raw materials and finished products more cheaply, faster and in greater volume. During those 50 years, our GDP exploded sixfold, and total employment surged fivefold.

The third GCD, between the 1890s and the 1940s, was supercharged by electrical power. This cheap and easy-to-access energy increased manufacturing efficiency and labor productivity by orders of magnitude, paving the way for a sixfold surge in GDP and a fourfold growth in the working population.

The fourth GCD, between the 1940s and the 1990s, was driven by cheap oil and the automobile. Americans relished their newfound mobility. Populations moved to the suburbs, and most families owned two cars. During those 50 years, our GDP rocketed eightfold, and the workforce grew fivefold.

Today we are in the fifth GCD, which is information technology and the microchip. This wave is sweeping away most other technologies and is changing our social, political and economic cultures in ways we never imagined possible. Today we are on the rising periphery of that wave.

A communication sent from Paris to San Francisco in 1864 might first travel by horse to Bordeaux and then would travel across the ocean by ship to New York, overland by stage to California and finally to San Francisco. It would take 10 weeks, and the cost in today’s coin was $26. Today a tap of the keys in Paris and electrons explode across a microchip at the speed of light as billions of pixels race across your monitor to San Francisco in a fraction of a second at a fraction of the cost. In 1864, no man could imagine a leap in technology that would produce jets, cellphones, 3-D printers, nuclear energy, television, instant potatoes and MRIs. And today I doubt that any man can imagine what a quantum leap in technology might bring us just 50 years hence.

After Johann Gutenberg’s printing press of the 1450s, global knowledge doubled about every 20 years. About 150 years ago, global knowledge doubled every 10 years. In the past 35 years, it has doubled every three years. In the next 18 months, the amount of new knowledge will exceed, by a factor of two, everything that has been learned since the birth of mankind. Creative destruction is the cause. Our ability to process the knowledge is the effect. That’s Schumpeter for you.